Virtual beauty parade; PublishersTechnology has put the squeeze on publishers in online advertising
BREAKFAST CEREALS ARE usually harmless enough, but Kellogg's, which makes a lot of them, has become many publishers' worst nightmare. Starting in 2009, the firm began to pour a lot of money into digital advertising, and today it spends around 25% of its $1.1 billion advertising budget online. That should be cheery news for digital publishers, but it has not worked out that way.
Behavioural targeting and programmatic buying have allowed Kellogg's to find the users they want to reach more easily and for less. It has now established a price benchmark of $5.40 per 1,000 impressions, down from around $12 just a few years ago. "Data have allowed us to find that audience at that price," says Jon Suarez-Davis, the company's vice-president of digital strategy. In the longer run the new techniques should allow Kellogg's to cut its spending on advertising, because digital involves less waste.
Publishers on the internet make money from advertising, subscriptions or a combination of both. Many are newspapers and traditional media companies that have moved into the digital age (such as the New York Times or CNN in America and the Guardian in Britain). Others are internet-born, producing content or hosting information (such as Facebook, Google's YouTube and Yahoo). Competition for online advertising is fierce. The supply of ad space on the internet is virtually infinite. Demand, on the other hand, is limited.
Behavioural targeting has complicated media companies' lives because it has made their once-vital role of aggregating audiences for advertisers much less important. Advertisers can now find the specific users they want for themselves. The media model has become "demand-led versus supply-led", says Nigel Morris at Dentsu-Aegis, an advertising agency. Companies still care about the context in which their ads appear online, but much less so than they used to under the traditional model. "I am looking first for the consumer, second for the ad products that let us get attention and third at the publisher," says Tariq Shaukat, chief marketing officer at Caesars, a casino and hotel chain. And real-time bidding has "hammered" many upmarket publishers by reducing their prices, according to Henry Blodget, the boss of Business Insider, a news website.
Local newspapers have already suffered from a precipitous decline in classified advertising, much of which has moved to Google. The new advertising technology is inflicting further damage on them because online bidding allows advertisers to see where users live. "Local isn't valuable any more," says Richard Frankel of Rocket Fuel, a firm that uses algorithms to buy advertising space for clients. "Anyone can sell local."
Make it special
The advertising market is splitting into two. Digital advertising has become increasingly commoditised, with online space being sold more cheaply on exchanges. To compensate, publishers are investing more in creating unique content for advertisers that can command higher prices. It is a bit like a chainstore suit manufacturer adding a bespoke tailoring unit.
"Content marketing", as this is called in advertising circles, can take different forms. Red Bull, an energy drink that has pioneered this trend, produces videos of extreme sports and hosts events. Chipotle, a restaurant chain, has produced a satirical online show about industrial farming. "Native" advertisements, often deliberately made to look like editorial content, are becoming more popular because consumers tend to spend more time looking at them.
Websites that require users to log in enjoy an advantage because they know quite a lot about them. "You're not a fake fleeting instance of you. You're you," says Brian Boland at Facebook. "You're the same you on your desktop, your iPhone or your Android."
Advertisers also like publishers with scale. The internet has transformed expectations about the number of people who can be reached through a single publication. The New York Times's 31m monthly online users pale by comparison with Facebook's 1.3 billion. The combination of size and knowledge about consumers has given tech giants an edge in online advertising. Google and Facebook alone controlled over 47% of all digital advertising in America last year, according to eMarketer, and over 57% of mobile advertising.
Technology companies are engaged in three races to accumulate even more power. The first is to serve advertisements on websites other than their own. They have been involved in a slew of deals to broaden their reach. Last year Twitter bought MoPub, a mobile-ad firm, for a reported $350m, which will help it serve ads to users across mobile applications. In July Yahoo acquired Flurry, which specialises in analytics for mobile apps.
The second is to invest in measurement systems that allow them to demonstrate the effectiveness of their online advertising. In May Google and AOL each bought a measurement firm (Adometry and Convertro, respectively). Facebook has formed a partnership with Datalogix, a data broker, to try to connect its online advertisements with offline buying.
The third is about who will create and own an "uber identity" which consumers can use to manage their online activities across websites. Google and Facebook both passionately want to win this race. Mobile consumers can already use their Facebook account to log into around 80% of the most popular mobile apps. This gives Facebook a head start.
Google dwarfs Facebook in revenue as well as in diversity. It serves ads on behalf of publishers and advertisers not just on its own sites but across the web. It owns Android, the world's most popular mobile operating system, as well as YouTube, the world's most popular digital video service. It is trying to get users to join its Google+ offering, which manages all Google services via a single log-in. As with its search results, Google is trying to predict what its customers might want before they even know it so it can get closer to them. In China Alibaba, an e-commerce giant, has built up a strong advertising business by showing ads from merchants that sell goods on its platform. Amazon, which holds huge amounts of data, is starting to invest more to scale up its advertising business and compete head-to-head with Google.
Next year "Mad Men", a television drama about the advertising business, will air the final episode of its final season. It has been wildly popular, but the end is nigh. The talk around the water cooler now is about "Silicon Valley", a show about tech geeks and their quest for wealth. Television audiences have a good nose for the next thing.
last updated february 2017